Westpac raises fixed home loan rate

Households are on notice that the days of super-low interest rates may be numbered after
Westpac
Banking Corp became the first major lender in almost two years to raise fixed home loan rates.

Westpac’s move came as the Reserve Bank of Australia reminded consumers and business that interest rates were “clearly below normal", implying that the cash rate would need to be raised if the economy expanded faster than anticipated.

While the RBA maintains a clear so-called easing bias – markets are betting on one more cut to the official cash rate this year – the weight of evidence suggests consumers, home buyers and investors are responding to last year’s rate cuts as policy makers intended.

In an upbeat speech about the economy, RBA deputy governor
Philip Lowe
predicted low official interest rates would lead to higher household spending, having already boosted consumer sentiment and asset prices.

The RBA’s Philip Lowe says higher household savings rate have been frustrating for retailers, but he now expects to see a rise in spending.
Photo: Michael O’Sullivan

Dr Lowe also challenged groups such as manufacturers and retailers by pointing out that the high exchange rate and recent rise in household savings rates had helped the economy weather the resources boom without driving up inflation or interest rates.

“Somewhat ironically, two of the factors that have created challenges for many businesses over recent years . . . are the very same factors that have been critical to Australia’s good macroeconomic performance," he said.

Dr Lowe’s assessment follows last week’s rise in payrolls, the biggest in 12½ years, as well as improved retail sales and business confidence indicators. The impact of last year’s interest rate cuts “still had further to run", the RBA said in minutes of its March meeting, released on Tuesday.

Westpac on Tuesday said it would increase two-year fixed home loans to 5.19 per cent from a three-year low of 4.99 per cent.

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The move is significant as fixed-rate mortgages are priced on expectations of future interest rate changes by the RBA and the outlook for bank funding. They typically move ahead of variable rates and last year accounted for about 12 per cent of new home loans, the highest proportion since 2008.

Mortgage broker Loan Market spokesman Paul Smith said that other banks were likely to follow. “For many home owners, the window to lock in a fixed rate that’s lower than a variable one is closing fast," Mr Smith said.

“While there remains a downward outlook on variable rates, fixed interest rates are now likely to rise and soon intersect with standard variable rates."

Westpac sought to downplay the significance of its move, with a spokesman saying its previous two-year fixed rate of 4.99 per cent was always a one-off promotion “which we clearly stated when we launched it last month and that it was for a limited period only".

The spokesman added that Westpac had also just launched a discount of as much as 1 per cent on variable interest rate mortgages of more $500,000.

The increase in fixed loan rates is a manifestation of rising medium-term bond rates as the market’s expectations of interest rate cuts fall away.

The benchmark three-year government bond rate traded as low as 1.94 per cent in mid-2012 – more than 1.5 percentage points below the then RBA cash rate of 3.5 per cent.

The three-year bond rate has since increased by more than 100 basis points to above 3 per cent, with the RBA cash rate of 3.00 per cent.

This spread allowed banks to raise fixed rate funds at attractive absolute yields which could then be passed on to fixed-rate borrowers.

Now, however, the bond-yield curve has normalised as fears of a global recession dissipate.

This means bond rates are progressively climbing as the term of borrowing grows.